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Will Starbuck's Growth Continue?

What is the main driving force behind Starbucks?

The coffeehouse chain giant Starbucks (NASDAQ:SBUX) keeps expanding its revenues and maintaining its profitability by opening new stores and extending its reach to Asia. Is the company's growth maintained solely by adding new coffeehouses? Does it also have organic growth, i.e. does its average coffeehouse sell more? How is the company performing in terms of growth in sales and profits compared to its global competitors? Let's analyze these issues.

Starbucks' store growthStarbuckscontinues to maintain its revenue growth by opening new stores and by improving revenue per store. In the second quarter, the company opened over 1,500 locations (company owned and franchised). The two main expansion areas are Asia (mainly China) and the U.S. The table below summarizes the data.

Source: Starbucks' website

As seen, most of the growth in sales came from opening stores (8.8%), while sales per store also improved but only by 4.1%. In other words, two thirds of the company's growth in sales came from new stores and one third came from higher revenue per store.

In comparison, Starbucks' main competitors such as Dunkin Brands Group (NASDAQ:DNKN) and McDonald's(NYSE:MCD) haven't done much better in improving their revenue per location.

Source: McDonald's website

Based on the above, McDonald's revenue grew by only 2.4% in the past quarter. Moreover, the main driving force behind this growth is that the company opened new locations. On average, a McDonald's store had lower sales in the past quarter than it did a year ago. Despite these figures, the company was able to maintain its high profit margin, which was nearly unchanged at 31%.

Dunkin Brands, much like Starbucks, expanded its revenue nearly 70%-through opening new locations. On the other hand, nearly 30% of its revenue growth came from higher sales per average store.

Source: Dunkin Brands website

The main driving force behind Starbucks' growth is the high expansion in Asia including China. In the past quarter, the company expanded its sales by over 40%. Most of the growth in revenue, however, came from opening new stores as indicated in the table below. In the U.S, on the other hand, most of Starbucks' rise in revenue came from improving the sales per store. This means that the high growth in Asia will eventually slow down once the company reaches the same level of exposure that it has in the U.S. This also means that the company's rapid rise in Asia heavily relies on capital expenditure.

Source: Starbucks' website

But let's not reduce Starbucks' growth to opening stores; the company has also been collaborating with other leading companies to reach new clients and strengthen its brand name. Back at the end of last year, Starbucks acquired Teavana Holdings, a leading brand in Tea, for $620 million. The company also expanded its agreement with Green Mountain Coffee Roasters for manufacturing, marketing, distribution, and selling Starbucks single serve packs for use in Green Mountain Coffee Roasters' Keurig single serve brewing systems worldwide. This partnership, which started back in March 2011, has been mutually beneficial for these companies. In the past years, Starbucks has successfully sold more than 850 million Starbucks coffee K-Cup packs. By extending and expanding this deal both companies are likely to augment their revenue and profit.

TakeawayStarbucks continues to move on the right track toward a higher profit margin and steady sales growth. The company has done better than its leading competitors in terms of improving its sales per store. Finally, the company's collaborations with other leading brands and its sharp growth in Asia should keep this coffee chain giant a lucrative investment.

Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg